SHOULD I BUY A ONE FAMILY OR MULTI FAMILY HOME?
by Fernando Arce, licensed Real Estate Broker
The real estate market in New York City is more complex then any other part of the country due to all the diverse type of properties. This article will discuss the different types of residential real estate which is defined as 1-4 family properties. Five family and more is considered to be commercial properties. Buyers always ask me, "should I buy a 1 or 2 family home?" My response is always to get pre-approved first to find out first what you qualify for.
Let's begin with a typical one family home. A buyer may not feel comfortable with the responsibility of having a tenant and having to deal with collecting rent and making repairs to the unit and so the buyer opts for a one family. A one family home will give the owner peace of mind at the same time not throwing money out the window by renting. As a primary residence, the owner will be able to deduct the mortgage interest payments from income taxes.
A typical home in the five boros of New York City will have a yearly real estate tax bill on average of $3,000. The advantage a primary homeowner and senior citizens have is the STAR Program to reduce your taxes. Below is a breakdown on how to qualify.
*The New York State School Tax Relief Program (STAR) provides homeowners with two types of partial exemptions from school property taxes. If you earn less than $500,000 and own and live in your home you're probably eligible for the STAR exemption.
Two types of STAR exemptions:
1. Basic STAR
- available for owner occupied, primary residences where the resident owners' and their spouses income is less than $500,000.
- exempts the first $30,000 of the full value of a home from school taxes.
2. Enhanced STAR
- provides an increased benefit for the primary residences of senior citizens (age 65 and older) with qualifying incomes.
- exempts the first $63,300 of the full value of a home from school taxes as of 2013-14 school tax bills (up from $62,200 in 2012-13).
STAR exemptions apply only to school district taxes. They don't apply to property taxes or other purposes such as county, town or city.
*www.ny.tax.gov
Some disadvantages of a one family home is, of course, not being able to collect any rents and therefore all the expenses including mortgage and utilities fall to the owner. Home value also will be limited when selling the property compared to 2-4 family properties.
Residential multi-units 2-4 families are attractive to many primary use buyers' not just investors. There are many advantages to owning this type of property. First, it may be easier to qualify for a mortgage and to afford monthly payments. For instance,
if your monthly mortgage, tax and insurance payments are $5,000 for a 3 family home and, lets say, you will rent out 2 units for $1,500 each ($3,000 cumulative), your monthly out of pockets payments after discounting your rents is just $2,000 ($5,000 - $3,000). However, keep in mind some tenants pay late or do not pay at all and there may be times when a unit sits vacant.
For many homeowners, investing in this type of property can be part of a long term retirement plan. A supplement income to your pension and or social security fund. Over the last five years, since the real estate bubble collapse, rents in NYC have increased steadily.
Another benefit of owning an investment property is your entitlement to take "depreciation" as an expense on your taxes. The rents collected are also considered income, so speak with your accountant to maximize your profit. Real estate taxes and hazard insurance along with all other utility expenses will increase as well.
Of course, with any asset investment there are some disadvantages you may be exposed to. For example, a 3 family and up must be registered with H.P.D. (Housing Preservation Dept.) a wing of D.O.B. (Dept of Buildings). If you buy a 6 family or more, it will likely be subject to rent control and or rent stabilization laws. Fire sprinklers, exterior fire escape stairs and other regulations are subject to these types of buildings.
Then there is the issue of tenants not paying their rent. An everyday occurrence for landlords with this type of property. You must be ready to face this type of problem diplomatically and not personally which can lead to more problems. Expect to lose an average of 6 months of rent. An attorney is recommended for such matters since the paperwork and bureaucracy in New York can be overwhelming. A typical type of eviction is called a "holdover" for non-payment of rent.
A broken boiler, a leak in the roof and toilets are issues you will confront at one o clock in the morning. It takes a certain type of person to be able to deal with the day-to-day problems of being a landlord. Are you up to that? It helps if you’re handy and can fix simple things. Having a local contractor available would be a good idea for taking care of issues if you are not available.
Lastly, in terms of financing a 1- 4 family property, you can buy one with as low as 3.5% down payment for an FHA loan or 10% or more down payment for a conventional loan. Interest rates vary from day to day. Five units and up is considered to be a commercial loan and will require a minimum of 30% down payment. Call me or speak to a professional real estate broker for more information.
Mr. Fernando Arce is a licensed real estate broker for over 17 years.
He can be reached by email at: fernando.arce@aol.com or by phone at: 646-306-4326.